If I could only buy one stock right now, then there are a few boxes that stock needs to check. I'd like the holding to be relatively safe in a tumultuous time but still look likely to generate modest short-term growth, while having the potential for exceptional long-term growth. I also want the stock to have a robust balance sheet and be relatively cheap in this expensive market -- and is a little dividend too much to ask?
For all of that, look no further than Apple (NASDAQ:AAPL).
Short-term growth prospects look good
Apple's finances are massive in almost every way, with sales in the fiscal Q4 ended Sept. 24 of $47 billion. Sales and earnings actually slowed during the during quarter, down 9% and 19%, respectively, but the company has guided for a return to sales growth in fiscal Q1.
Some Apple bears have pointed to the company's reliance on its iPhone -- which made up about two-thirds of sales in the most recent quarter -- and that those sales are starting to slow as the phone seems to be saturating the addressable market. The average selling price (ASP) of the iPhone segment has fallen slightly year over year.
However, the iPhone could have plenty of growth left. The new iPhone 7 launched in late 2016 seems to be performing very well already and should help to boost ASP once again. Additionally, the issues with the exploding Samsung Galaxy Note 7, which has even been banned on all U.S. aircraft, could help to make 2017 iPhone sales the highest yet.
The bears also point to nascent growth in most of Apple's other products, such as its personal computers, iPads, and the Apple Watch. One other area that's growing impressively is the services segment, which includes revenue from services such as iTunes, iCloud, and Apple Pay. This segment's revenue grew 24% year over year to $6.3 billion in the fiscal year, making up 13% of total revenue as Apple's second largest segment by sales behind the iPhone segment. Services are increasingly important, as the total number of Apple products in use continues to grow each quarter, meaning more devices that are likely linked to an Apple account and could help services revenue to continue growing nicely.
Apple's robust financial position
While Apple's sales and earnings have come under pressure, its cash growth has not. Apple's operating cash flow in the most recent quarter surged to $16 billion, a new company record for that time period. With so much excess cash flow, the company has grown its total cash and investments to $238 billion, more than a third of its market cap, and about double the next wealthiest company in the United States.
Unfortunately for Apple's capital expenditure advocates, about 90% of that money is stored out of the U.S., as the company has resisted paying heavy repatriation taxes to bring it back home. However, President Trump has signaled that he'd like to offer a much lower tax rate, maybe as low as 10%, for companies in Apple's position that are seeking to send huge chunks of money home. There are certainly other risks for Apple in some of Trump's proposed tax ideas, such as potential import tariffs on goods manufactured overseas, but this one point is important for what it could mean for Apple's cash available for immediate use.
Long-term growth potential
Apple's modest short-term growth on continued incremental innovations and execution is encouraging, but it's much more fun to consider Apple's moonshot long-term growth possibilities. Apple increased its research and development spend by about 25% to $10 billion in fiscal 2016.
Speaking of the company's huge cash position, there are a few fun reckless predictions we can make about what the company might spend that money on developing. Self-driving cars, virtual and augmented reality, and more recently original content for iTunes are all areas of growth that tech industry analysts are looking for from Apple.
My favorite reckless prediction is that Apple will begin competing more heavily in artificial intelligence. Apple's Siri was one of the first voice-based search tools before Amazon.com (NASDAQ:AMZN) and Google (NASDAQ:GOOG)(NASDAQ:GOOGL) entered the space with their smart home voice-activated devices.
Amazon and Google beat Apple to market with their home assistant devices, but Apple isn't known for being an early market mover -- rather, Apple has a knack for swooping in with amazing products that in turn dominate the market that's already there. Let's not forget that Amazon and Google have ventured into Apple's world with their consumer electronics much more than Apple would be venturing into theirs with its own artificial intelligence assistant.
Why Apple stock still looks like a great buy
Finally, in terms of valuation, Apple still looks cheap. Even though the stock is up 20% over the past six months, it's still trading at just 14 times earnings. Compare that with around 25 times earnings on average for the S&P 500, Google at 30, and Amazon at 185. Also, Apple stock has run up quickly lately, but it's still down from its high of around $135 in mid-2015, so its recent run doesn't look unreasonable.
Add to that a relatively cheap valuation, as well as all of the points covered here, that Apple stock also pays a 2% dividend yield, which could very well rise as Apple deploys more of its huge cash load in 2017. The best investment strategy is one that's well diversified, but for all of those points -- if I could only buy one stock, Apple continues to look like a great stock to buy and hold as a core long-term position.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Seth McNew owns shares of Apple. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon.com, and Apple. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool has a disclosure policy.